Vertical Agreements and Group Exemptions in Turkish Competition Law

ADMD Law Office
Sevgi Asama

The concept of competition is defined in doctrine as the relationship between enterprises that sell the same type of goods or services to a consumer group at the same time. In accordance with this definition, competition law could be possibly defined as a branch of law that includes regulatory, supervisory, and prohibitive norms to prevent competition violations in order to ensure economic efficiency, to create and maintain the free competition order in the goods and service markets, and to resolve competition violations.

Competition Law in Turkish legislation is regulated by the Law on the Protection of Competition No. 4054 (“Law No. 4054”), which bears the traces of the European Union Competition Law, and the Block Exemption Communiqué on Vertical Agreements No. 2002/2 (“Communiqué”) regarding vertical agreements. In addition, the Block Exemption Communiqué on Vertical Agreements and Concerted Actions in the Motor Vehicles Sector No. 2005/4 specifically regulates vertical agreements in the motor vehicles sector. Moreover, there are other communiqués within the framework of the implementation of the Competition Authority Law.

1. TRANSACTIONS REGULATED UNDER THE LAW NO. 4054

1.1 Violation Article and Exception of the Law No. 4054

The purpose of the Law No. 4054 is to prevent agreements, decisions, and practices that prevent, distort, or restrict competition in the goods and service markets, to prevent the abuse of this dominance by the enterprises that dominate the market, and to ensure the protection of competition by making the necessary regulations and inspections.

In order to achieve this purpose, it is possible to assemble the transactions under the Law under three main titles. First, agreements, practices, and decisions that prevent distort, and restrict competition between all enterprises operating in or affecting the goods and service markets within the borders of Turkey; secondly, the abuse of this dominance by enterprises that dominate the market; the third is all kinds of legal transactions in the nature of mergers and acquisitions, that aim to create a dominant position or to strengthen an existing dominant position, and as a result, which will significantly reduce competition.

Article 4 of the Law No. 4054 could be considered as a fundamental violation. Pursuant to the relevant Article of the Law, “Agreements, concerted practices and such decisions, and actions of associations of enterprises that aim to directly or indirectly prevent, distort or restrict competition in a certain good or service market, or that have or may cause such an effect, are unlawful and prohibited.”

Set out of Article 5 of the Law, the exemption institution is regulated as an exception to the prohibition in the Article 4. Pursuant to the relevant article, the Competition Authority may decide to exempt the agreements between enterprises from the application of Article 4 in the presence of the following conditions:

1. To ensure new developments and improvements or economic or technical development in the production or distribution of goods and the provision of services,
2. Consumers benefit from it,
3. Competition does not disappear in a significant part of the relevant market,
4. The competition should not be limited more than is necessary to achieve the objectives in (a) and (b).

In the exemption decisions to be made within this framework, the Institution may attribute the exemption to certain conditions or the fulfillment of certain obligations. If the exemption is subject to a condition in this way, it becomes effective from the date the condition is fulfilled.
The Institution's decision on exemption within the framework of Article 5 may be in the form of an exemption to agreements of similar nature, through a group communiqué, or it may be in the form of an individual exemption decision.

Applying to the Institution for an individual exemption decision comes to the fore in terms of agreements that do not fall within the scope of the exemption. Thus, pursuant to Article 8 of the Law, the Institution has the authority to issue a negative clearance certificate that an agreement is not contrary to the Law.

In practice, enterprises, with a negative clearance request in order to clarify whether the agreement they will covenant is within the scope of exemption; if it is not deemed appropriate to issue a negative clearance certificate, they apply to the Institution with a request for an individual exemption. As a result of the progressive demands submitted in this way, it is clear from the beginning whether an agreement will violate the Law.

However, it should be noted that, in terms of the Communiqué No. 2002/2s., the Institution also has the authority to retrieve the exemption. E.g., even if the Institution has given an exemption certificate in the negative clearance judgement with the belief that an agreement should be exempted from the implementation of the Law pursuant to the Communiqué No. 2002/2, it may withdraw the exemption if it is later determined that this agreement has effects incompatible with Article 5 of the Law. Therefore, the legal situation provided by the negative clearance certificate does not provide an absolute guarantee that the agreement will be immune from the implementation of the Law throughout its duration. As a result, the assumption that agreements included in block exemption meet the requirements listed in Article 5 of the Law is not an absolute assumption.

2. VERTICAL AGREEMENTS

2.1 Definition and Elements of Vertical Agreement

Vertical agreements are defined as “agreements made between two or more enterprises operating at different levels of the production or distribution chain for the purpose of buying, selling, or reselling certain goods or services”. There are three main elements of the vertical agreement, which are:

1. Two or more enterprises must be parties to the agreement. Therefore, since the agreements with non-enterprise end users are not covered by Article 4 of the Law, they are not subject to block exemption.
2. The enterprises that are party to the agreement shall be operating at different levels of production or distribution. The distribution agreement concluded between a manufacturer enterprise as a supplier and a wholesaler is an example of a simple vertical agreement in this context. A supply agreement concluded between an enterprise that is a raw material producer and another enterprise that uses this raw material in production is also included in the definition of the vertical agreement stipulated by the Communiqué. An agreement concluded between three enterprises, the parties of which are the manufacturer company, the wholesale distributor, and finally, the retailer selling the products to the consumer is also considered as a vertical agreement and could benefit from the block exemption provided that it fulfills the conditions stipulated in the Communiqué.
   
   The emphasis here is that the enterprises that are party to the agreement operate at different levels of distribution. In the contrary case, for instance., if an enterprise in the position of wholesaler concludes the same distribution agreement at once with more than one supplier operating at the next level of the distribution process, the said agreement does not comply with the definition of the vertical agreement stipulated in the Communiqué. Rather than concluding the same agreement at once with competing suppliers, the wholesaler enterprise shall conclude the agreement separately with each of the suppliers.
3. The agreement shall be made for the purpose of buying, selling, or reselling certain goods or services. Accordingly, the Communiqué covers both purchase (supply) and distribution agreements. In other words, it is not substantial for what purpose the buyer buys the goods or services that are the subject of the agreement from the supplier. The buyer may have purchased the goods or services that are the subject of the agreement for resale or use in his own production. Even if the buyer has purchased the contractual goods from the supplier for the purpose of leasing them to third parties, the agreement concluded with the supplier will fall within the definition of the vertical agreement stipulated in the Communiqué. However, the lease agreement concluded between the buyer and the third party (e.g., financial leasing-leasing agreements) cannot be considered as a vertical agreement since there is no purchase, sale, or resale of any goods or services. Furthermore, if the agreement is signed with the end-user, it is not considered a vertical agreement.

2.2 Types of Vertical Agreements

2.2.a Vertical agreements involving the use of intellectual property

In the case of a vertical agreement that includes arrangements for the purchase, sale, or resale of goods or services, the vertical agreement may benefit from the block exemption, provided that certain conditions are met, if there are also provisions regarding the transfer of intellectual rights to the buyer or their use by the buyer.

In the 4th paragraph of Article 2 of the Communiqué, titled “Scope”, the conditions that vertical agreements involving the transfer of intellectual rights to the buyer or their use by the buyer shall meet in order to benefit from the block exemption are specified. The aforementioned vertical agreement could be evaluated within the scope of block exemption, provided that all of the elements described below are met:

1. Provisions on intellectual property should be directly related to the use, sale, or resale of the goods or services subject to the agreement.
2. The purchase, sale, or resale of the goods or services subject to the agreement should be the main purpose of the agreement. In other words, the transfer of intellectual rights to the buyer or making them available to the buyer should serve the purchase, sale, or resale of the goods or services subject to the agreement and should not constitute the main purpose of the agreement. This condition is generally provided in franchise agreements. Intellectual rights transferred to the franchisee in order to maintain the uniformity of the franchise system are generally necessary ancillary for the purchase, sale, or resale of the goods or services that are the subject of the agreement.

In the agreement, it is important to whom the intellectual rights are given to whom. In case of transfer or use of intellectual rights by the buyer, the block exemption provided by the Communiqué could be used. Otherwise, if the intellectual rights are transferred by the buyer to the supplier and certain restrictions are imposed on the sales of the supplier, such a vertical agreement is not eligible to benefit from the block exemption. For example, the enterprise (contractor) that performs the production and is in the position of the supplier in contract manufacturing contracts usually obtains the know-how required for production from the enterprise that is in the position of the buyer. In order for the practices of chain markets that make up their own brands to be produced by producing enterprises within the scope of the Communiqué, the chain market shall not produce the product in question and shall not transfer know-how to the manufacturer, which is the supplier.

Provisions regarding the transfer and use of intellectual rights should not contain competition restrictions that have the same purpose or effect as vertical restrictions that are not exempted in the Communiqué.

2.2.b Vertical agreements between rival enterprises

Regardless of whether they operate in the same geographical market or not, suppliers operating in the same product market or having the potential to operate in the same product market in Turkey are considered as “competing enterprises”.

As vertical agreements between rival enterprises are of the nature of “horizontal agreements”, they cannot benefit from the exemption granted by the Communiqué as a rule. However, in the exception to the said provision, enterprises could only compete with each other at the distribution level. In other words, vertical agreements where the supplier is both the producer and the distributor of the goods subject to the agreement and the buyer is the distributor, not the producer, of the goods competing with these goods, can benefit from the block exemption. Thus, enterprises in the position of producers will be able to distribute their products through independent buyers on the one hand and distribute themselves on the other hand.

3. SCOPE OF GROUP EXEMPTION COMMUNIQUE REGARDING VERTICAL AGREEMENTS NO. 2002/2
In 2002, the Competition Board issued the Block Exemption Communiqué on Vertical Agreements No. 2002/2, which covers many types of vertical agreements. In 2003, the “Block Exemption Communiqué on Vertical Agreements No. 2002/2” was published in order to clearly state the issues to be considered by the Competition Board in the implementation of the said Communiqué and thus to minimize the uncertainties that may arise in the interpretation of the Communiqué by enterprises.

In accordance with Communiqué No. 2002/2, “vertical agreements” between two or more enterprises operating at different levels of the production and distribution chain are exempted as a group from the prohibition in Article 4 of the Law.

Pursuant to the provision of Article 2/2 of the Communiqué; “The exemption provided by this Communiqué is applied if the market share of the supplier in the relevant market in which the supplier provides the goods or services subject to the vertical agreement does not exceed 40%.” Because in this case, the possibility of abuse of the dominant position is high. Unless the enterprises in this situation take an individual exemption decision regarding their agreements before making a vertical agreement, it will be possible to invalidate the agreements they have made pursuant to Article 4 of the Law.

Similarly, Article 2/3 indicates that, “In vertical agreements that include the obligation to supply to a single buyer, the exemption is applied provided that the buyer's share in the relevant market from which the goods and services subject to the vertical agreement does not exceed 40%.”. Here, on the other hand, the opposite of the aforementioned situation is arranged.

In accordance with Article 2/4 of the Communiqué, if there are provisions regarding the transfer of intellectual rights to the buyer and their use by the buyer in the agreements regulating the purchase, sale, or resale of goods or services, such vertical agreements also benefit from the exemption. So far; the transfer of intellectual rights must not constitute the main purpose of the contract and this transfer must be related to the use, sale, or resale of the said goods and services. In addition, if the provisions on intellectual property have the same purpose as the agreements not exempted by this Communiqué, they cannot benefit from the exemption this time.

Article 2/5 of the Communiqué states that vertical agreements between contender enterprises cannot benefit from the exemption. At this point, it should be noted that since the agreement between the two contender enterprises will already be of the nature of a “horizontal agreement”, it will not be included in the scope of the Communiqué. However, in the subsequent of the provision, the supplier is both the manufacturer and the distributor of the goods in question; however, it has been stated that the agreement between such two enterprises will benefit from the exemption even though the buyer is only the distributor.

3.1 Limitations that Exclude Agreements from Block Exemptions

Pursuant to Article 4 of the Communiqué, if the limitations mentioned in this article are included in the agreement, the agreement will not benefit from the exemption.

3.1.a Determination of the resale price

Sub-paragraph (a) of the first paragraph of Article 4 of the Communiqué is about preventing the freedom of the buyer enterprise to determining its own selling price. Accordingly, it is strictly forbidden to set a fixed or minimum selling price for the buyer. However, it is possible for the supplier to determine the buyer's maximum selling price or to recommend the buyer's selling price, provided that it does not translate into a fixed or minimum selling price. In order for the maximum or advisory sales, prices notified to the buyer not to turn into a minimum or fixed price, it must be clearly stated in the published price lists or on the product that the said prices are maximum or advisory.

3.1.b Limitation of Region and Customer

Region or customer sharing types listed under four headings in subparagraph (b) of the first paragraph of Article 4 of the Communiqué are not considered as restrictions that exclude agreements from block exemption:

1. Restriction of active sales to be made by the supplier to an exclusive territory or exclusive customer group allocated to supplier or a buyer, provided that sales to be made by the buyer's customers are not covered,
2. Restricting the sales of the buyer operating at the wholesale level to end-users,
3. Restricting members of a selective distribution system from selling to unauthorized distributors,
4. In the case of parts supplied for assembly purposes, restricting the buyer from selling them to the competitor of the manufacturer supplier.

3.1.c Selective distribution systems

As stated in Article 4/1 (c) of the Communiqué, no active or passive sales could be imposed on the members of the selective distribution system in terms of sales to end-users. Even if the enterprise in the position of supplier establishes exclusive zones by stating that it will supply goods to a limited number of buyers in a certain region, active or passive sales by buyers to end-users outside the region cannot be prevented.

In other words, buyers who are members of the selective distribution system could make active or passive sales to the end-user in the region they wish. However, a buyer who is a member of the system may be prevented from relocating the point of sale where the buyer continues its activities or opening a new point of sale by the provider. Because, as stated above, in the selective distribution system, the physical characteristics of the point of sale are the most important factor affecting the success of the distribution system.

The other regulation that opens the selective distribution system to competition, albeit partially, has been made in Article 4/1 (d) of the Communiqué. Accordingly, enterprises that prefer the selective distribution system as a distribution system cannot impose a one-stop purchasing obligation on the buyers who are members of the system. In other words, system members are not obliged to purchase products from the supplier; system members cannot be prevented from purchasing products from other member enterprises.

3.1.d Other limitations

Another regulation regarding the supply agreements regarding the products formed by assembling the parts is included in Article 4/1 (e) of the Communiqué. In the supply agreement concluded between the supplier who sells such items and the buyer who combines these items in production, the supplier cannot be prevented from selling these items as spare parts to end-users or repairers who are not authorized by the buyer for the maintenance or repair of the goods. As it is seen, the said limitation is brought to the supplier by the buyer, unlike the above.

An example of this situation is the relationship between the supplier who produces bicycle chains and the buyer who uses these chains in bicycle production. The buyer bicycle manufacturer cannot prohibit the supplier chain manufacturer from selling chains to end-users or unauthorized, independent repairers. However, the bicycle manufacturer in the position of buyer may require its authorized repairers to purchase chains only from itself. In addition, the chain manufacturer may be prohibited from selling to other bicycle manufacturers.

3.2 Obligation of Non-Compete

In Article 3 of the Communiqué, a non-compete obligation is defined as a direct or indirect obligation that prevents the buyer from producing, purchasing, selling, or reselling goods or services that compete with the goods or services that are the subject of the agreement. Accordingly:

1. “The non-compete obligation imposed on the buyer for an indefinite period or for a period exceeding five years cannot benefit from the exemption in the Communiqué. If it is decided that the non-compete obligation can be renewed implicitly beyond the period specified above, the non-compete obligation is deemed to be for an indefinite period.
2. “Any direct or indirect obligation imposed on the buyer, relating to the period after the termination of the agreement, that prohibits the buyer’s from producing, buying, selling, or reselling goods or services. However, if there is a condition that the prohibition relates to goods and services in competition with the goods or services that are the subject of the agreement, provided that the buyer is limited to the facility or land in which the buyer operates during the agreement and it is mandatory to protect the know-how transferred to the buyer by the supplier, a non-compete obligation may be imposed on the buyer for a period not exceeding one year from the termination of the agreement. The right to indefinitely prohibit the use and disclosure of non-public know-how is reserved.
3. “Obligation imposed on members of a selective distribution system not to sell branded products of designated competing suppliers”

Non-compete obligations manifested in this manner, will not benefit from the protection provided by Communiqué No. 2002/2.

3.3 Retrieval of the Exemption Provided under the Communiqué

All vertical agreements that fulfill the conditions sought in the Communiqué are exempted from the prohibition in Article 4 of the Law. Because, while issuing the said Communiqué, the Board assumed that the agreements covered by the Communiqué fulfill the exemption conditions listed in Article 5 of the Law.

However, even if it fulfills the conditions stipulated by the Communiqué, there may be exceptional cases where some vertical agreements cannot meet the exemption conditions in Article 5 of the Law in terms of their effects. Especially in cases where the enterprises that are party to the vertical agreement have a significant market power and the restrictions on entry to the market reach significant dimensions, it may be difficult for some types of vertical agreements within the scope of the Communiqué to meet the necessary conditions for exemption.

An important authority has been given to the Board to be used in such exceptional cases. In the first paragraph of Article 6 of the Communiqué, if it is determined that an agreement exempted by the Communiqué has effects that are incompatible with the conditions set forth in Article 5 of the Law, the Board will not agree to the agreement. It has been decreed that he can retrieve the exemption granted by the Communiqué. Therefore, even if any vertical agreement has been issued in accordance with the Communiqué, the exemption protection provided by the Communiqué may be retrieved by the Board if it has deviated from meeting the conditions that allow exemption due to its effect on the market during the implementation phase.

In the retrieval process, the effect of the agreement is evaluated together with the features of the product, restrictions on entry to market, and most in particular, market power. In this sense, written or oral opinion of the supplier or buyer is requested before the final decision. The Board may refer to written and oral opinions of other parties to the agreement and related third parties.
The retrieval of the exemption will not be retroactive. Therefore, since the retrieval of the exemption will not be retroactive, the agreement will have benefited from the exemption during the period until the decision is taken.